TaxTMI 
TaxTMI 
2021 (2) TMI 1250
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.... ITA No.3114/Del/2014 (by the Revenue) (A.Y. 2007-08) 3. Facts of the case, in brief, are that the assessee is a company engaged in the business of manufacturing and trading of herbal products of health and personal care, cosmetics and veterinary products and FMCG products, etc. It filed its return of income on 26th October, 2007 declaring nil income which was processed u/s 143(1) of the IT Act. The case of the assessee was selected for scrutiny and notice u/s 143(2) of the IT Act, 1961 was issued and served on the assessee on 29th September, 2008. Subsequently, the assessee company revised its return of income on 18th March, 2009 wherein it revised its book profit u/s 115JB to Rs. 2,80,57,67,940/- as against Rs. 263,44,87,072/- declared earlier. During the course of assessment proceedings, the AO noted that net profit of Rs. 284,22.30 lakh has been declared from the sales of Rs. 1778,02.43 lakh and other income of Rs. 16,51.17 lakh as per copies of audited Profit & Loss Account, Balance Sheet and its annexures filed along with Audit Report during the course of assessment proceedings. As per revised 'Computation of Taxable Income' filed during the course of assessment proceedings....
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.... alleged to have been charged as service fee for the corporate guarantee given by the appellant to Dabur Egypt on various factual and legal grounds. 3) That without prejudice to Ground No. 2 above, giving of corporate guarantee is not the international transaction by which the concerned AE has been benefited and accordingly the addition to the extent of 0.50% in respect of the service fee alleged to have been charged on the corporate guarantee given to Dabur Egypt is arbitrary and bad in law. 4) That in the absence of any contract as existing during the year between the assessee and three AEs, neither any royalty accrued during the" year nor can it be presumed to be receivable and consequently the order of the TPO and sustained by the CIT (Appeals) are without any basis/material and are based on surmises and conjectures not permissible under the law. 5) That the TPO and CIT (Appeals) failed to consider the geographical conditions of working of Dabur International UAE, Dabur Nepal and Asian Consumer Care Ltd., Bangladesh having no substantial awareness about the Dabur brand in the area and consequently the presumption and assumption about the chargeability of royalty by invoki....
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....ced to Dabur International Ltd., UAE, an Associated Enterprises and has also erred in holding that in case of loan given in International currency, the interest rate to be applied should be LIBOR plus margin. 4. On the fact and in the circumstances of the case the CIT (A) has erred in /restricting the addition for royalty receivable by the assessee from Dabur International .Ltd., UAE to 2% on total FOB sales in place of royalty @ 3% of FOB sales as determined by the TPO. 5. On the fact and in the circumstances of the case the CIT (A) has erred in restricting the addition for royalty receivable, by the assessee from Dabur Nepal Pvt. Ltd., to 2% on total FOB sales in place of royalty @ 7.5% of FOB sales as determined by the TPO. 6. On the fact and in the circumstances of the case the CIT (A) has erred in deleting the addition of Rs. 70,49,000/- and directing the AO to re-compute the deduction u/s 801B and 80IC of the Act without further allocation of the head office & other expenses to various units eligible for such deduction. 7. On the fact and .in the circumstances of the ease the C1T (A) has erred in the addition of Rs. 4,09,871/- in respect of belated payment of employee....
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....ank guarantee to the assessee. In the facts and circumstances of the case I am inclined to take mean of two available rates. The mean of two available CUP rates work out to 2%. This rate of 2% is further enhanced by 200 basis points being the adjustment for the risk that the assessee is bearing. Detailed discussion in this regard has been done in the preceding paragraph. The working of the Corporate Guarantee charges is made as below: Value of Bank Guarantee Rs. 802.40 Lacks Charges @4.00% as discussed above Rs. 3,209,600 I therefore determine the arm's length price of providing the services by the assessee in the shape of bank guarantee to AE at Rs. 3,209,600/-. An upward adjustment of Rs. 3,209,600/- is made on this account. Since the assessee has not charged any amount on account of providing the guarantee, the amount of Rs. 3,209,600/- is more than 5% of the value of international transaction." 11. The AO accordingly made the addition of Rs. 32,09,600/-. 12. In appeal, the ld.CIT(A) directed the AO to adopt 0.5% as service fee for corporate guarantee given by the assessee to Dabur Egypt. He, however, held that no service fee towards corporate guarantee can be charged fo....
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.... guarantee cannot be totally overlooked. Given the risk, there is possibility of impact on profit, losses, assets or liabilities of guarantor. No person will assume this risk without being adequately secured and demanding some form of return. Accordingly, I hold that issuance of corporate guarantee is an international transaction and ALP is required to be computed u/s 92. 6.2 It now clearly emerges that providing guarantee is an international transaction and it needs to be benchmarked as per provisions of section 92(1). The Appellant had charged NIL rate for providing the corporate guarantee and in its TP study report, has justified arm's length compliance by following TNMM. The appellant has taken a position that provision of corporate guarantee is integral part of sale transactions and hence it need not be separately benchmarked However, the appellant has not explained how this transaction of providing corporate guarantee is part and parcel of sales transactions, I therefore, do not agree with such approach of the appellant because provision of corporate guarantee is not at all linked with sales transactions and it being an independent transaction, can not be clubbed with sale ....
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....the banks. 6.4 I have carefully examined the submission of the Appellant and other evidences placed on record. As regards Dabur Nepal, NABIL Bank stated that it would not have charged any extra interest with or without corporate guarantee. This is evidence directly from the bank concerned and hence cannot be ignored. Further, it has been noted that corporate guarantee has been released on 27th July 2006. This means that corporate guarantee provided by the appellant remained in operation only for four months period comprised in FY under consideration. Hence, with respect to Dabur Nepal, I hold that no service fees towards corporate guarantee can be charged. Hence, I direct the AO to delete the additions made on account of corporate guarantee in case of Dabur Nepal. 6.5 In case of Dabur Egypt, the letter from HSBC Bank states the loan facility was available to Dabur Egypt at a rate of 11.90% for Egyptian loan with corporate guarantee versus 12.50% without corporate guarantee. However, it is noted that rates as mentioned by the bank pertain to the period of December 2011 when Dabur Egypt requested for release of corporate guarantee The bank has itself mentioned that rates have und....
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....not on the basis of corporate guarantee given by the assessee to the bank. Further, the AE got no significant advantage of lower rate of interest from bank if assumption of benefit of corporate guarantee is considered. The loan given by bank was on pure financial consideration of the AE concerned. The bank has secured the loan by way of charge of assets of the borrower. He accordingly submitted that no service fee was charged by the assessee from its AEs on account of issue of corporate guarantee. 15. The ld. Counsel for the assessee submitted that in case of corporate guarantee due to lack of external comparable transactions, one has to deploy a method to determine the economic benefit arising from the financial guarantee. There is guidance provided by foreign revenue authorities which have held that the yield or the "interest saved" could be an appropriate method to quantify the economic benefit arising from the financial guarantee. He submitted that the yield approach involves estimating the rate at which the borrower would obtain funds on a stand-alone basis on a given date and compare this interest rate with the interest rate at which it would obtain funds on the same date an....
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....11. Referring to page 345 of the paper book, the ld. Counsel for the assessee drew the attention of the Bench to the letter dated 11th September, 2013 issued by HSBC Bank, Egypt SAE and submitted that in the said letter, on account of release of corporate guarantee requested by Dabur Egypt, the bank increased the interest rate from 11.90% to 12.5%. Therefore, as per the said letter, the incremental interest saved due to guarantee provided by the assessee was 0.60%. However, since the benefit of an explicit guarantee accrued to both the guarantor and the borrower, the interest benefit should ideally be split between the parties to the transaction i.e., the borrower and the guarantor. He submitted that usually as a rule of thumb the interest benefit is split between the guarantor and the borrower on 50:50 basis which is considered to be the most equitable share of benefits. Applying the aforesaid rule, the ld. Counsel for the assessee submitted that the benefit that can be attributed to the service fee on account of corporate guarantee could at the most be 0.30%. He accordingly submitted that the action of the CIT(A) in charging service fee at an ad hoc rate of 0.5% should be reverse....
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....unt of corporate guarantee at 0.50% as against 4% adopted by the TPO and deleted the balance addition made by the AO. It is the submission of the ld. Counsel that no cost or expenses have been incurred by the assessee for issue of corporate guarantee in favour of its AEs. It is also his submission that the loans obtained for the foreign AEs of the assessee were secured loans having a charge against the assets of the AEs and other collaterals offered by AEs. The assessee had given corporate guarantee on behalf of AEs only to provide an additional cover against the loans obtained and, therefore, no addition is called for. 22. We find some force in the above arguments advanced by the ld. Counsel. So far as the corporate guarantee to NABIL Bank,, Nepal against the loan of Nepalese Rs. 6 crores obtained for Dabur Nepal Pvt. Ltd., Nepal for which the assessee had issued a corporate guarantee is concerned, we find, such guarantee was for a short duration of four months which was thereafter released on 27th July, 2006, a fact not disputed by the Revenue. The submission of the ld. Counsel for the assessee that there was no interest savings on account of corporate guarantee issued by the as....
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....acts of the case, in brief, are that the TPO, during the course of TP assessment proceedings noted that the assessee has not received any royalty from its AEs. He noted from the records that in the assessment year 2005-06 and 200607, the assessee had received royalty from Dabur Nepal (P) Ltd., Dabur International, UAE and Asian Consumer Care P. Ltd., Bangladesh, the details of which are as under:- Company Royalty received in AY 2005-06 Rs. in Lakhs Royalty received in AY 2006-07 Rs. in Lakhs Royalty received in AY 2007-08 Rs. in Lakhs Dabur Nepal (P) Ltd Nepal 43.34 5.34 -- Asian Consumer Care P. Ltd Bangladesh 46.87 21.02 -- Dabur International UAE 164.41 -- -- 25.1. The TPO referred to the agreement entered into by the assessee with its AEs for receipt of royalty. On being confronted by the AO regarding non-charging of any royalty from its AEs, the assessee submitted its objections which the TPO has summarized and which are as under:- * The assessee does not have any contractual obligation to receive the royalty. * The agreement with Dabur Nepal has been terminated in May, 2005 and hence Dabur Nepal is under no obligation to pay the royalty. * The agreement....
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....ollowing its earlier order for AY 2006-07, proposed to charge royalty at the old and controlled rates. In doing so, the AO violated the basic principle of transfer pricing i.e., comparison of controlled transaction with the uncontrolled transaction. It was argued that even if the AO had to apply the royalty rates, such rate arrived at should have been uncontrolled for the purposes of transfer pricing. It was argued that the AO/TPO, without going into the merits of this year's case, proceeded to make adjustment on the basis of previous year. It was brought to the notice of the ld. CIT(A) that his predecessor has decided the issue partly in favour of the assessee and allowed relief the details of which are as follows: S. No. Name of AE Rate levied by TPO in order of AY 2007-08 Rate as per CIT(A) order of AY 2006-07 1. Dabur Nepal P Ltd 7.50% 2% 2. Dabur International Ltd 3% 2% 3. Asian Consumer Care Limited, Bangladesh 6% Not Applicable 29. The various clauses of the agreement with the AE were brought to the notice of the CIT(A). It was argued that the assessee has not charged royalty from Dabur International Ltd., UAE, Dabur Nepal (P) Ltd. and Asian Consumer Care Li....
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....he appellant had been using Dabur India's trademarks and trade names. Upto FY 2004-05, the appellant was getting royalty payments from its AE's, whereas during FY 2006-07, appellant did not receive any royalty. 12.2 The case of the appellant is that the agreements under which royalty was received in earlier period were no longer in existence. Moreover, the overseas AE's are incurring substantial expenses for brand promotion in their respective territories and therefore there is no payment of royalty. In order u/s 92CA(3), the TPO computed arm's length price of royalty as under: Rs.in lakhs Name of AE FOB Sales Rate of Royalty Royalty Royalty shown in books Difference Dabur Nepal (P) Ltd. Nepal 2148 7.5% 161.10 NIL 161.10 Dabur International Ltd UAE 1129 3.0% 33.87 NIL 33.87 Asian Consumer Care Limited 1195 6% 71.70 NIL 71.70 Adjustment 266.67 12.3 The TPO computed arm's length royalty by applying rate of royalty as mentioned in agreement dated 05.11.1992 with Dabur Nepal (P) Ltd., Nepal and dated 01.04.2003 with Dabur International Ltd., UAE and dated 01.02.1993 with Asian Consumer Care (P) Limited Bangladesh. 12.4 T....
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....ant as no state of art technology is involved in manufacturing process of products involved. These contentions of the appellant have been duly considered. Firstly, it cannot be said that value of brand 'Dabur' is Nil as no royalty has been accounted for by the appellant. There must be some value of the brand for which royalty income has to be determined having regards to arm's length price. Secondly, the appellant has not established that AE in Nepal, UAE and Bangladesh are incurring abnormal AMP expenses which exceed 'Bright Line Test'. The appellant has not established its view by giving figures of AMP in case of comparables operating in respective geographical locations. The appellant has not established that tax authorities of Nepal, UAE and Bangladesh have held such AMP expenses as exceeding bright line. Upto AY 2005-06, the appellant has been receiving royalty income from its AEs. The appellant could not establish that after AY 2005-06, its AMP expenses have decreased and AMP expenses of its AEs have increased substantially which may point towards appellant's case that its AEs are doing brand building efforts and hence providing service to it. Therefore, appellant's contentio....
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....rnational Ltd. @ 3% of sales while the appellant has not declared any royalty income, The appellant has contended that w.e.f. 01,04,2005, this agreement has been terminated and has furnished letters dated 07.04.2005 and 01.02.2013. the appellant has further contended that Dabur International was not sourcing any technical knowhow from Dabur India for its products manufactured in UAE and has furnished letters dated 18.07,2011 and 20.07.2011 which state that products manufactured by Dabur International Ltd in UAE are different from those manufactured in India and no technical support from Dabur India is being taken for the purpose. 12.7.1 The applicant has argued that agreement with Dabur International has become inoperative w.e.f. 01.04.2005 and hence there was no obligation on part of Dabur International to pay royalty. As discussed supra, since income arising from international transaction has to be determined having regards to arm's length price, existence of agreement or otherwise is not relevant. Therefore, argument of the appellant that agreement was not in operation during period under consideration is not relevant as price of international transaction is to be determined b....
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....al FOB sales ie. Average rate. Accordingly, I hold that arm's length price of royalty from Dabur International is Rs. 22.58 lakhs. The AO is directed to give relief to the appellant on this account accordingly. 12.8 Dabur Nepal Pvt. Ltd., Nepal 12.8.1 The appellant has entered into an agreement dated 05.11.1992 with Dabur Nepal Pvt Ltd., clause 3 of which is reproduced as below: "That as Dabur is allowing DNPL to use its trademarks for sale of products in Nepal, India and other third countries and also entire marketing expenses including salaries and allowances of sales personnel would be borne by Dabur, DNPL will pay to Dabur inform of royalty @7.5% of net sales. " Based on this, the TPO has computed royalty chargeable from Dabur Nepal @ 7.5% of sales while the appellant has declared royally income of Rs. NIL. The appellant has contended that w.e.f. 01.04.2005, this agreement has ceased to be operative and has furnished letters dated May, 2005 and 05.02.2013 in support. The appellant has contended that TPO has wrongly applied rate of 7.5% as mentioned in agreement dated 05.11.1992 while that agreement was amended and rate of royalty was changed to 3% w.e.f. 01.04.2004....
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....epal than that with Dabur International. As discussed supra, I have held that royalty at rate of 2% of FOB sales would be arm's length price in respect of Dabur International. Accordingly, I hold that royalty at rate of 2% of FOB sales would be arm's length price in respect of Dabur Nepal also and this would take care of non¬discharge of obligations on part of the appellant. In this manner, royalty chargeable from Dabur Nepal comes out to be Rs. 42.96 lakhs. The AO is therefore, directed to give relief on this account accordingly. 12.9 Asian Consumer Care Pvt Ltd, Bangladesh 12.9.1 The Appellant contends that in case of Dabur Bangladesh, the agreement was valid for 2 years and expired in 2005. From 01-04-20005, the appellant did not renew the agreement but an amendment was made with a condition that royalty will be revised to 2% for composite usage of Trademark and technical know-how provided by the Appellant to Bangladesh. Further Bangladesh will pay 1% technical know-how royalty to the Appellant and no trade mark royalty will be payable if Bangladesh was to incur 8% of AMP spent on sales. However, it seems from the contention of the Appellant that even this was not acted ....
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....es as a pre requisite. Besides this the Appellant contends that no technology has been provided by them to Bangladesh. However, no cogent evidence has been produced by the Appellant that no technology was provided by them after 01-04-2005. The contentions of the Appellant that agreement was not in force after 01-04-2005 and hence no technology could have been provided has not been clearly established. However, a fact remains that Dabur logo was continued to be used by Dabur Bangladesh even after termination of agreement post 2005. 12.9.5 In view even if Dabur Bangladesh was incurring AMP in excess of 8% of sales, a bright line test need to be demonstrated to show the benefit availed by the appellant. Hence the contention that no royalty should be charged in not tenable. With regards to technology, no concrete evidence has been furnished to show the claim that no technology is received by Bangladesh. It is also seen that international transaction of allowing use of trade name/trade mark to its AEs by the appellant is the same with respect to Dabur International and Dabur Nepal. Therefore, there is no reason to assign higher price in respect of international transaction with Dabur ....
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.... following: a) That Dabur Nepal will be entitled to use the trade mark of 'Dabur' for sale of products in Nepal and abroad during the duration of the agreement; b) That the assessee will assist in recruitment of specialized personnel to train and impart information on technical know-how and marketing of produce to personnel at its production works in India and for which Dabur shall not charge any fee; c) That the entire marketing expenses including salaries and allowances of sales personnel would be borne by the assessee. In consideration of such expenses being borne by the assessee, Dabur Nepal agreed to pay royalty @ 7.5% of its net sale. 36. Referring to clause 7 of the agreement, he submitted that that the aforesaid agreement was to become effective only after the approval by the Government of Nepal and was to remain valid for a period of 10 years from that date unless renewed by mutual consent in writing and with prior approval of Government of Nepal. 37. He submitted that in 2004, the aforesaid marketing agreement was amended with effect from 01.04.2004, wherein the royalty payable by Dabur Nepal was reduced to 3% on local sales of branded products only. He submitted ....
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.... 35,181.11 % of sales to Indian group companies 72% 39. He accordingly submitted that in view of the above, no royalty could have been charged by the assessee in respect of those goods which were sold to the assessee and its group company. 40. Without prejudice to the above, the ld. Counsel for the assessee submitted that even if it is assumed that the royalty was to be charged by the assessee, then same amount would be added in the purchases of Dabur Nepal and thus the impact will be revenue neutral i.e. on the one hand, income will be increased by crediting the royalty and on the other hand, the cost of purchases will be increased by the same amount, since the sale was made by M/s Dabur Nepal Pvt. Ltd. to the assessee/group company. He accordingly submitted that no royalty was chargeable from Dabur Nepal Pvt. Ltd. 41. Referring to the order of the Tribunal in assessee's own case for the immediately preceding assessment year, vide ITA No.3257/Del/2013, order dated 12th April, 2017, the ld. Counsel submitted that the issue stands covered in favour of the assessee wherein the Tribunal held that no royalty was payable to the assessee by M/s Dabur Nepal (P) Ltd. and deleted the ....
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....t from financial year 2005-06. The said letter was accepted by the assessee vide communication dated 01.02.2013 addressed to Dabur International wherein it was confirmed that the agreement has ceased to operate w.e.f. 01.04.2005 and also the assessee permitted Dabur International to use logo of'Dabur' upon condition that the company will promote 'Dabur' trademark on its own cost and as per the standard norms of the assessee relating to quality of product and other specified conditions. 44. He accordingly submitted that during the assessment year 2007-08, the agreement on the basis of which royalty was payable, was not in existence and thus, no royalty was due to be received to the assessee in year under consideration. 45. He further submitted that no royalty could be chargeable from Dabur Dubai during the year under consideration due to the following reasons: a) The assessee was having 100% ownership in Dabur International, directly/indirectly and thus, it could not have received any royalty from itself. b) The agreement was not renewed by Dabur International in the year 2005 and the same was defunct in the financial year 2006-07. Thus, in the absence of any contractual agree....
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....lized by Dabur International. 47. He further submitted that brand value in a particular area does not depend upon ownership but it depends upon various factors like quality and acceptable products in local public and in the present case, Dabur International, by incurring expenditure and making efforts had become the economic owner of the mark in commercial sense for that area. 48. The ld. Counsel for the assessee submitted that Dabur International is wholly owned by the assessee, and therefore, it was necessary for Dabur International to use and depict the name "Dabur" which basically denotes the ownership mark on the products manufactured and continuation of the use of name "Dabur" on the products was in the nature of shareholder's activity, not only to secure the investment made by the assessee but also to enhance the value of "Dabur" brand. 49. The ld. Counsel for the assessee drew the attention of the Bench to the FAR Analysis of royalty as under: S.No. FAR Points Dabur India Dabur Dubai 1. Who is the legal owner of brand Yes No 2. Who incurs the cost of registration and renewal cost Yes No 3. Who decides what products to be launched in overseas market No ....
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....ding, which far more exceeded the royalty which the assessee would have otherwise received [royalty of Rs. 1.15 cr @1% on sales of Rs.l 14.25 cr.] in case it had agreed to reimburse/borne the aforesaid AMP expenses. 54. Referring to the order of CIT(A), he submitted that the ld. CIT(A) has incorrectly stated that the assessee was unable to establish that the associated enterprise incurred abnormal AMP expenses which exceeded the 'Bright Line Test' as no AMP spend figures were provided, without appreciating that the said figures were duly filed by the assessee and also re-produced in the appellate order @ page 33, which clearly established that the associated enterprise had incurred substantial AMP expenditure, which exceeded the bright line test. Further, the TPO/AO had not applied any Transfer Pricing method as prescribed under the Act, but simply made the adjustment in respect of royalty based on the earlier agreement which had already expired. He submitted that no notional royalty ought to be imputed in the income of the assessee merely on the basis of the defunct royalty agreement dated 01.04.2003 and in the absence of any evidence of provision of any services technical or oth....
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....der consideration; (b) products manufactured by Dabur International were different from the products manufactured in India; (c) heavy marketing expenses were borne by Dabur International; and (d) no expenses incurred by Dabur International for brand building were reimbursed/borne by the assessee, but proceeded to impute adhoc royalty rate of 0.75%, without giving any basis or calculation for applying such rate. Further, the Tribunal failed to appreciate that "Dabur" was not used as a brand name for the products, but it merely represented ownership title and nothing more. 57. He submitted that the Tribunal, at para 33 and 34 of the order, has given a finding that arm's length price in respect of an international transaction is to be calculated by adopting any of the five methods prescribed in section 92 of the Act and also discussed the provisions of section 92C of the Act along with Rules 10B and 10C which prescribe the methods to determine the arm's length price based on similar type of payments received by similarly situated and comparable independent entities. Further, the Tribunal also gave a finding that the lower authorities have failed to apply any transfer pricing method a....
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.... The ld. Counsel for the assessee, however, pointed out that the assessee's appeal against the order of the Tribunal has been dismissed by the Delhi High Court and reported as [2018) 253 Taxman 129, as not laying down any substantial question of law. 62. Referring to the order of the Hon'ble High Court, he submitted that the Hon'ble Court dismissed the appeal as not laying down any substantial question of law. Further, while dismissing the appeal, the Court observed that the assessee's submissions that omission to show an initial income cannot be scrutinized at all cannot be accepted. The Court further observed that the assessee is required to explain why the Dabur brand has been permitted to an overseas entity without any charge. 63. The ld. Counsel for the assessee submitted that the aforesaid observations are only in the context of adjudicating whether or not the assessee's appeal give rise to any substantial question of law or not, in order the High Court to assume jurisdiction to entertain the appeal or not. 64. Referring to the decision of the Hon'ble Supreme Court in the case of Santosh Hazari v. Purushottam Tiwari: [2001] 251 ITR 84 (SC), the ld. Counsel for the asse....
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....rnational has incurred substantial expenses on advertisement, market establishment and had borne all the risks of market, manufacture and finance, therefore, it is in a way entitled to the economic benefits related to the brand 'Dabur' in UAE. In view of the aforesaid, it may be inferred that though the legal ownership of the 'Dabur' brand vests with the assessee-company, but by incurring significant AMP expenses and building the brand of'Dabur' in UAE which was almost non-existent earlier, Dabur International has gained/acquired economic ownership of the brand 'Dabur' in UAE. 68. Referring to the decision of Hon'ble Delhi Court, in the case of Sony Ericsson Mobile Communications India Pvt. Ltd vs CIT: 374 ITR 118 he submitted it has been held that the concept of economic ownership is well recognized in international taxation. It has been held in the above decision that if the Indian entity is the economic owner of the brand and is incurring AMP expenses for the purpose of promotion of such brand, benefit is only received by the Indian entity. Applying the same rationale to the facts of the present case, Dabur International, UAE is the economic owner of the brand in UAE and has in....
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....ember, 2005 and the same was not renewed thereafter. Thus, in the absence of any contractual agreement, the assessee was not eligible to receive any royalty from ACCPL. c) Products manufactured by ACCPL using technical knowhow of the assessee did not meet the requirements of customers in Bangladesh. Accordingly, after 2006, ACCPL entered into an agreement with Dabur Dubai to provide technical know. d) Merely on the basis of trade name of "Dabur" the products manufactured by ACCPL were not accepted in Bangladesh and that it had to manufacture the products as per the local needs and taste of the public residing in the public area. e) In order to penetrate Bangladesh market, ACCPL adopted its own market strategy and had made all the efforts for the establishment of "Dabur" name in Bangladesh which was very little known in that geographical area and incurred lot of expenses on advertisement, market establishment and had borne all the risks of market, manufacture and finance. f) The assessee had neither made any efforts in establishing the trade name in Bangladesh nor had made any contribution towards the same to ACCPL. 70. He further submitted that brand value in a particular ....
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....rescribed methods under section 92C of the Act, therefore, the adjustment on account of royalty, made by the TPO/CIT(A), is unlawful, not sustainable and is liable to be deleted. 74. The ld. Counsel for the assessee further submitted that since ACCPL has incurred substantial expenses on advertisement, market establishment and had borne all the risks of market, manufacture and finance, therefore, it is in a way entitled to the economic benefits related to the brand 'Dabur' in Bangladesh. He drew the attention of the Bench to the analysis of Royalty which is as under:- S.No. FAR Points Dabur India Dabur Dubai 1. Who is the legal owner of brand Yes No 2. Who incurs the cost of registration and renewal cost Yes No 3. Who decides what products to be launched in overseas market No Yes 4. Who forms marketing strategy for brand promotion in overseas market No Yes 5. Who decides on sales strategy No Yes 75. Referring to the above, he submitted that though the legal ownership of the 'Dabur' brand vests with the assessee-company, but by incurring significant AMP expenses and building the brand of 'Dabur' in Bangladesh which was almost nonexistent earlier, ACCPL has g....
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....e has to be assessed under section 92 of the Act. However, the CIT(A) reduced such calculation of royalty. 80. So far as royalty from Dabur international Ltd., UAE is concerned, the ld. CIT(A) observed that the products manufactured by Dabur International Ltd, UAE are different from those manufactured in India and in some cases, even the raw material is different. He held that most of the products manufactured in UAE are manufactured without technical support from India. He accordingly, reduced the rate of royalty to 2% as against 3% charged by the TPO and accordingly restricted the arm's length price at Rs. 22.58 lakhs. 81. So far as Dabur Nepal Pvt. Ltd., Nepal is concerned, the CIT(A) observed that Rate of 3% is mentioned in the amended agreement and the assessee could not meet its obligation to bear entire marketing expenses and therefore, Dabur Nepal Pvt. Ltd, Nepal did not pay any royalty. Accordingly, the ld. CIT(A) applied the same rate of royalty of 2% as in case of Dabur International Ltd, UAE and restricted the arm's length price from Dabur Nepal Pvt. Ltd. at Rs. 42.96 lakhs. 81.1. So far as Asian Consumer Care Pvt. Ltd., Bangladesh is concerned, the ld. CIT(A) observ....
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.... Redrock Ltd. and the said company became 100% subsidiary of the assessee and name was changed to "Dabur International Ltd." and the agreement was not renewed by Dabur International in the year 2005 and the same was defunct in the financial year 2006-07 and, therefore, in the absence of any contractual agreement, the assessee was not eligible to receive any royalty from Dabur Dubai. Further, the products manufactured by Dabur Dubai were totally different from the products manufactured in India by the assessee. In order to penetrate UAE market, Dabur International had made all the efforts for the establishment of "Dabur" name in the UAE which was very little known in that geographical area and it has incurred lot of expenses on advertisement, market establishment and had borne all the risks of market, manufacture and finance. The assessee had neither made any efforts in establishing the trade name in UAE nor had made any contribution to Dabur International. Further, Dabur International had not renewed the royalty agreement because the assessee was not willing to undertake any risk/obligation/responsibility. 81.4. So far as Asian Consumer Care Pvt. Ltd., Bangladesh is concerned, it ....
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....d., UAE at 0.75% by observing as under:- "33. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is an admitted fact that the assessee had not shown any receipt on account of royalty from M/s Dabur International Ltd., UAE and had shown royalty of Rs. 5.34 lacs from M/s Dabur Nepal Pvt. Ltd. on the FOB sales of Rs. 7526.84 lacs and Rs. 3319.50 lacs respectively. The TPO worked out the royalty @ 4% of the sales in the case of Dabur International Ltd. and @ 7.5% of the sale in the case of Dabur Nepal Pvt. Ltd. The ld. CIT(A) reduced the royalty @ 2% of FOB sales. In the instant case, it is noticed that the assessee earlier entered into an agreement with M/s Redrock Ltd. who was registered in the Channel Island, U.K with its principal office at 54-58, Althol Street, Doughlas, Isle of Man, U.K. and had been manufacturing and producing various products for sale after utilizing technical information provided to it by the assessee in terms of agreements executed from time to time and lastly on 2nd day of April 2001 which had expired on 31st day of March 2003. Thereafter, another agreement was ent....
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....hing is brought on record to substantiate that the products manufactured in UAE were with the help of technical know-how and R&D support of the assessee. On perusal of the provisions contained in Section 92 of the Act it would be clear that the income arising from an international transaction shall be computed having regard to the arm's length price which shall be determined by any of the 5 methods prescribed in Sub-Section (1) of Section 92 of the Act which are following: "(a) Comparable and controlled price method; (b) Resale price method; (c) Cost plus method; (d) Profit split method; (e) Transactional net margin method; or such other method as may be prescribed by the Board." 34. It is also not in dispute that for determination of the arm's length price, the provisions contained in Sub-Section (2) of Section 92C of the Act shall be applied. The various methods has been prescribed under Rule 10B of the Income Tax Rules, 1962 to determine the arm's length price u/s 92C of the Act and Rule 10C of Income Tax Rules, 1962 further states that in selecting the most appropriate method, following factors shall be taken into consideration: "(a) The specific characteristic of....
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....equirement and local taste of the local public, however, he directed the AO to calculate the royalty @ 2% but without any basis. In the present case, it is an admitted fact that the TPO/AO had not applied any transfer pricing method as prescribed under the Act and simply made the adjustment in respect of royalty based on the earlier agreements which had already expired and there was no new agreement between the assessee and its AEs. The earlier agreement was entered by M/s Redrock Ltd. on 1st April 2003, at that point of time, the said company was manufacturing the products with the technical know-how and R&D support of the assessee in respect of Aurvedic/Herbal products. But later on, when the said company found that the Aurvedic products were not acceptable in UAE as in the said country Unani system of medicines was acceptable as per the local trend and custom. The said AE in UAE had abandoned the manufacturing of the Ayurvedic/herbal products and then entered into the business of FMCG products which were earlier manufactured by the Redrock Ltd. with its own technology as per the requirement and taste of a local public of UAE by keeping into consideration the geographical and mar....
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....ncerned, it is not in dispute that earlier the royalty received was @ 7.5% as the assessee was bearing the cost of marketing expenses but later on M/s Dabur Nepal Pvt. Ltd. incurred lot of expenditure in order to penetrate the market and the agreement was amended w.e.f. 1st April, 2004 vide which the royalty had been reduced from 7.5% to 3% (copy of the same is placed at page no. 113 of the assessee's paper book). In the preceding year, on the basis of the said amended agreement, the royalty was charged @ 3%. Therefore, the TPO was not justified in working out the royalty @ 7.5% as provided in the original agreement dated 05.11.1992 (copy of which is placed at page nos. 111 & 112 of the assessee's paper book). For the year under consideration, M/s Dabur Nepal Pvt. Ltd. has not paid any royalty to the assessee for the reasons that it had to incur the expenses to penetrate the market. In this regard, vide letter written in May 2005, it was informed to the assessee that no royalty will be payable from Financial Year 2005-06. It was also claimed that as per the Clause 7 of the original agreement dated 05.11.1992, the agreement shall become effective only after the approval by HMG Nepal....
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.... as the argument of the ld. Counsel that the order of the Tribunal cannot be accepted because the same is not based on correct appreciation of facts is concerned, we do not find any merit in the argument of the ld. Counsel since as fairly conceded by the ld. Counsel at the time of hearing before us, the Hon'ble High Court has already dismissed the appeal filed by the assessee on this very issue. 81.9 So far as the royalty from Asian Consumer Care Pvt. Ltd., Bandladesh is concerned, we find, the facts and salient features of the agreement are identical to that of the facts and agreement with Dabur International Ltd., UAE. Since the Tribunal has already restricted such royalty to 0.75% in case of Dabur International Ltd., UAE, therefore, respectfully following the ratio of the decision of the Tribunal in assessee's own case for the immediately preceding assessment year while restricting such royalty to 0.75% in case of Dabur International Ltd., UAE, we restrict the royalty from Asian Consumer Care Pvt. Ltd., Bangladesh to 0.75%. 81.10 In view of the above discussions, the grounds relating to the issue of Royalty by the Revenue are dismissed and the grounds raised by the assessee ar....
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....n to Dabur International Ltd, UAE and charged an interest rate of 7% and 6.75%. The loan/interest transaction was benchmarked by the Appellant in the TP Study of AY 2007-08 by application of internal GUP where rate charged by Bank of Baroda for Commercial Papers was 5.675%. However, the Ld TPO did not agree with the approach of the Appellant and applied the rate of 14%. As per the TPO, the benchmarking done the by Appellant is faulty as the Appellant himself taken its as tested party in the TP Report. Once the Appellant becomes the tested party, then it becomes imperative to see what the tested party would have earned in the similar situation i.e. in the Indian Market. Then the Ld TPO proceeded to arrive the LIBOR rates as per details mentioned in the TP Order at Page 4 and 5 of the TP Order AY 2007-08. However, TPO has not done comparability analysis of loan transaction of the appellant. As per Rule 10(B)(2), the comparability of controlled transaction with uncontrolled transaction requires comparison on following factors: "For the purposes of sub-rule (1), the comparability of [an international transaction or a specified domestic transaction] with an uncontrolled transaction sh....
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....ssociated enterprises, but for their relationship, would have entered into the same transaction, are taken into account. Whether the funds are advanced out of interest bearing funds or out of funds on 14% interest is being paid, or whether such interest free advances are commercially expedient for the assessee or not, is wholly irrelevant in this context. The transaction in the present case is of lending money, in foreign currencies, to its foreign subsidiaries. The comparable transaction therefore is of foreign currency lending by unrelated parties." 9.3 Now, what is required to be seen is whether the controlled transaction can be compared with uncontrolled ones. As the Appellant, the Ld-TPO failed to apply the test of Rule 10B(2) while recommending an ALP of 14% on interest. At once place, the TPO arrived interest rate by investment theory in bonds and on other, he tried to used LIBOR. However, the manner in which the interest rates were arrived both under investment theory or LIBOR theory cannot be said to meet the standards of TP comparability. 9.4 In the course of submission, the Appellant submitted the prevalent LIBOR rates during the FY 2006-07 as follows: 1-Mon....
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.... document, the transaction of loan advanced to the AE is benchmarked by applying CUP method wherein the interest charged by the Bank of Baroda for commercial papers @ 5.675% has been treated as appropriate internal uncontrolled transaction. The ld. Counsel drew the attention of the Bench to clause (a) of Rule 10B(1) of the IT Rules, 1962 and submitted that the said provision provides for application of CUP method. He submitted that there are two types of comparable uncontrolled transactions. The first is known as internal comparable and is a transaction between one of the parties to the controlled transaction and unrelated third party. The second, known as external comparable is a transaction between two unrelated third parties. He submitted that generally specific details regarding internal comparables are more readily available to the parties engaged in the controlled transaction than details regarding external comparables. In the light of the above external CUP should be used with utmost caution and if internal CUP is available, it is perfect over external CUP. 82.8 Referring to the following decisions, he submitted that internal comparables available in case of a tax payer oug....
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....s to be repaid. Referring to the decision of the Delhi Bench of the Tribunal in the case of Bharti Airtel Limited vs. ACIT, 161 TTJ 428, he submitted that in this case also the Tribunal has held that in a case where loans are advanced in foreign currency, the interest rate on foreign currency loans being qualitatively different and accordingly, even if one has to see the interest that the assessee would have earned, one has to see the interest that the assessee would have earned on foreign currency loans and not rupee denominated loans. He also relied on the following decisions and submitted that the order of the CIT(A) is fully justified under the facts and circumstances of the present case:- (i) Siva Industries and Holdings Ltd. vs. ACIT [ITA No. 2148/Mds/2148]; (ii) Tata Autocomp Systems Ltd. vs. ACIT [ITA No. 7354/Mum/2011], (iii) Four Soft Ltd. vs. DC1T: 142 TTJ 358 (Hyd.); (iv) DCIT vs. Tech Mahindra Ltd. : 46 SOT 141 (Mum); (v) Tricom India Ltd. vs. 1TO [ITA No. 322/Mum/2014]; (vi) Parle Biscuits (P.) Ltd. Vs. DCIT (ITA No. 9010/Mum/2010); (vii) PMP Auto Components (P.) Ltd. Vs. DCIT : 66 SOT 42; (viii) Hinduja Global Solutions Ltd. Vs. ACIT (ITA No. 254/Mum/....
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.... loan from AEs. We find, the ld.CIT(A) deleted the addition made by the AO/TPO on the ground that interest rate to be applied in case of international loan given in international currency (USD) should be LIBOR + margin. He noted that in the instant case, the average LIBOR rate for A.Y. 2006-07 was 5.20% whereas the assessee has charged interest @ 6.75/7% which is much higher than the comparable ALP rates. He further noted that the TPO while adopting the rate of 14% has contravened the provisions of Rule 10B(2) which prescribes the factors for comparability of controlled transactions of uncontrolled transactions. 82.15 We do not find any infirmity in the order of the CIT(A) deleting the addition made by the AO/TPO. The provisions of Rule 10B(1)(a) read as under:- "10B . (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction or a specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) comparable uncontrolled price method, by which,- (i) the price charged or paid for property transferred or services provide....
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....ssee in the instant case has charged interest on loan @ 6.75%/7% from Dabur International, UAE, which is higher than the internal CUP wherein interest rate charged by Bank of Baroda for Commercial Papers was 5.675%, therefore, the international transaction of interest received, in our opinion, is considered to be at arm's length applying the CUP method. 82.18 We find, the Hon'ble Delhi High Court in the case of DCIT vs. Cotton Naturals India (P) Ltd. (supra) while upholding the finding of the Tribunal with respect to appropriate comparable rate of interest on foreign currency denominated loan, has held as under:- "39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. He have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should....
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....nd 80IC of the Act without further allocation of the head office and other expenses to various units eligible for such deduction. 83.1 Facts of the case, in brief, are that the AO, during the course of assessment proceedings noted that the assessee has 18 industrial units undertaking manufacturing of products out of which ten units were eligible for deduction u/s 80IB/80IC of the Act which are as follows:- 1) Jammu Unit-1 2) Jammu Unit-2 3) Uttranchal Unit 4) Chawyanprash- Baddi Unit 5) Amla-Honey Baddi Unit 6) Glucose- Baddi Unit 7) Shampoo- Baddi Unit 8) Toothpaste- Baddi Unit 9) Honitus- Baddi Unit 10) Oral care- Baddi Unit 84. He noted that the assessee company has declared profit of Rs. 28,422.29 lakhs from business on the sales of Rs. 1,77,802.43 lakhs and other income of Rs. 1651.17 lakhs which include profit of Rs. 30285.30 lakhs raised on the sales of other income aggregating to Rs. 1,11,781.27 lakhs in respect of manufacturing units of the above units against which the assessee has claimed deduction of Rs. 27,209.71 lakhs u/s 80IB and 80IC. In view of the above facts, the AO noted that there are loss of Rs. 1863.01 lakhs from business activities of t....
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....t the deduction available u/s 80IB/80IC in respect of various units, depreciation as per Companies Act was added back and depreciation as per IT Act was claimed. Therefore, there is no situation for further allocation of Rs. 70.50 lakhs. Similarly, the assessee had added certain expenses which were allowable under the provisions of Income-tax Act and, hence, these expenses were never claimed by the assessee. However, the AO has allocated these expenses to all units in the ratio of sales percentage thereby reducing the profits of units. The disallowance as per computation of income was brought to the notice of the CIT(A) which is as under:- "Disallowance as per Computation of Income Particulars Amount ( Rs Lacs) Amount (Rs Lacs) Misc. Exp Written off ESOP Exp 1035.37 Technical Know How 18.75 1054.12 Other Disallowances Donation 414.05 Provision for Bad Debts 94.85 Scientific research exp 651.00 1159.90 Total 2214.02." 88. It was further submitted that ESOP expenses, technical know-how expenses, donation and provision for bad debts have been added back in the computation of taxable income by the ass....
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..../s 80IB/IC. The AO has not proved any nexus between these expenses and eligible units. Deduction u/s 80IB/IC is available in respect of profit derived from eligible business. The term 'derived from' requires existence of direct nexus both with respect to items of income and expenditure. I have carefully gone through the case law relied upon by the appellant wherein Hon'ble ITAT has laid down the same principle. 15.4 In view of above, I direct the AO to recompute the deduction available u/s 80IB/IC without further allocation of HO expenses to various units as done by him in the impugned assessment order. The grounds of appeal are allowed." 90. Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal. 91. The ld. DR strongly relied on the order of the AO. The ld. Counsel for the assessee, on the other hand, relying on the order of the CIT(A), submitted that in the grounds of appeal preferred by the Revenue, it has only challenged the deletion of disallowance of Rs. 70.49 lakhs as against Rs. 704.49 lakhs which is a typographical error. The ld. Counsel referring to page 67 of Paper Book-I submitted that during the financial year under consideration, de....
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....see, during the year under consideration, had 18 industrial units undertaking manufacturing of products out of which 10 units were eligible for deduction u/s 80IB/80IC of the Act, the details of which were given at para 83 of this order. During the year, the assessee declared profit and gains from eligible business on the basis of separate books of account and claimed deduction aggregating to Rs. 27,209.71 lakhs u/s 80IB and 80IC of the Act. According to the AO, the Head Office expenses amounting to Rs. 2214.02 lakhs were not allocated to the units. Further, according to the AO, depreciation to the tune of Rs. 704.49 lakhs on assets of the Head Office was not allocated to the units. Accordingly, the AO allocated the Head Office expenses and depreciation in the ratio of sales of eligible units for computing the deduction u/s 80IB/80IC and restricted such deduction to Rs. 25,404.88 lakhs as against Rs. 27,207.71 lakhs claimed by the assessee. We find, the ld.CIT(A) reversed the action of the AO and directed him to recompute the deduction u/s 80IB/80IC of the Act without further allocation of head office expenses and depreciation to various units by observing that the assessee has its....
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....s. 2,902.3 lakhs in accordance with the provisions of section 32 of the Act. The depreciation as claimed in the return of income was duly allocated among all the units including the eligible units. We, therefore, find no infirmity in the order of the CIT(A) in reversing the action of the AO in allocating the difference of depreciation available under the Companies Act and Income-tax Act to the eligible units. 93.3 So far as the Head office expenses are concerned, we find the AO has allocated the head office expenses of Rs. 2,214.02 lakhs the details of which are as under:- S. No. Particulars Amount (in Rs. lakhs) 1. Miscellaneous expenses written off 1054.12 (a) ESOP expenses 1035.37 (b) Technical know-how 18.75 2. Donation 414.05 3. Provision for Bad Debts 94.85 4. Scientific research 651.00 Total 2214.02 93.4 A perusal of page 425 of paper book, Volume-II shows that Miscellaneous expenses written off, donation and provision for bad debts were suo motu disallowed by the assessee in its return of income. Therefore, once the aforesaid expenses were not claimed as a deduction by the assessee, the same, in our opinion, can....
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....mitted that although the assessee has deposited employees' contribution to ESIC after the due date specified in the Act, but, it has deposited such deposits before the due date of filing of the return u/s 139(1) of the Act. Referring to the decision of the Tribunal in assessee's own case for the immediately preceding assessment year, the ld. Counsel submitted that the Tribunal at para 68 of the order has decided the issue in favour of the assessee and dismissed the ground raised by the Revenue on this issue by following the decision of the Hon'ble Supreme Court in the case of CIT vs. Alom Extrusions Ltd., reported in 2009 TIOL-125-SC-IT. Referring to the decision of the Hon'ble Rajasthan High Court in the case of DCIT vs. Rajasthan State Beverages Corporation Ltd., reported in 250 Taxman 32, he submitted that when PF and ESI was paid before the due date of filing of returns, the same could not be disallowed under section 43B or under section 36(1)(va). He submitted that the SLP filed by the Revenue has been dismissed by the Hon'ble Supreme Court reported in 84 taxmann.com 285. Referring to copy of letter dated 10.09.2018 addressed by Pr. Director of Income-tax (Legal and Research),....
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....D should not be allowed. Rejecting the explanation given by the assessee and applying the provision of Rule 14A r.w. Rule 8D, the AO made disallowance of Rs. 1,57,45,700/- and added the same to the total income of the assessee. 102. In appeal, the ld.CIT(A) directed the AO to delete the addition on the ground that no satisfaction was recorded by the AO u/s 14A(2) of the Act regarding the incorrectness of the claim made by the assessee. Further, no disallowance of interest on borrowed funds could be made u/s 14A of the Act in case of mixed pool of funds as it is not possible to ascertain whether there exists any nexus between borrowed funds and tax free funds. The relevant observations of the ld.CIT(A) reads as under:- "24.1 I have gone through the submissions of the Appellant The facts are that the Appellant had not disallowed any expenditure u/s 14A on its own. The Appellant had contended that apart from investment in equity shares of Dabur Pharma Ltd., none of its investments could have earned tax free returns u/s 10 of the Act so as to disallow the expenditure u/s 14 A. Only dividend income of Rs. 30,000 which is exempt has been earned during the period under consideration an....
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.... 14A to compute such disallowance as per prescribed method (Rule 8D) but only after recording his satisfaction that the claim of the appellant is not correct. In present case, the AO has not stated any reason for not agreeing with . claim of the appellant and thus requisite satisfaction on part of the AO is not discernible from the assessment order. Resorting to provisions of sub-section 2 of section 14A by the AO is subject to pre-condition of his satisfaction about incorrectness of claim of the appellant and therefore without satisfying this pre-condition, the AO can not compute disallowance as per section 14A(2). This principle has been laid down by jurisdictional Hon'ble Delhi High Court in case of MAXOPP INVESTMENT LTD v CIT [201l-TIOL-753-HC-DEL-IT]. 24.6 Further, no disallowance can be made u/s 14A of interest on borrowed funds where in case of mixed funds, it is not possible to ascertain whether there exists an nexus between borrowed funds and tax free investment. This principle has been laid down in following cases: * Hero Cycles 323 ITR 518 (P&H) * DCIT v Maharashtra Seamless Ltd. (2011) 16 Taxman.com 97 (Del) 24.7 The AO has made a disallowance of Rs, 1.57 crores....
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....ligible relatable to dividend yielding investment has to be considered. The alternate argument of the ld. Counsel for the assessee is that disallowance, if any, cannot exceed the exempt income as held by various decisions. 106. Since the assessment year involved in the impugned appeal is 2007-08, therefore, provisions of Rule 8D cannot be applied for the impugned assessment year as held in various decisions. Further, it has been held in various decisions that provisions of section 14A are applicable only if the assessing officer at the first place finds that the assessee has actually incurred expenses which have proximate nexus with earning of dividend income and not otherwise. However, in the instant case, there is no such recording of satisfaction, therefore, we find some force in the argument of the ld. Counsel that in absence of recording of any satisfaction, provisions of section 14A cannot be applied mechanically. Further, the interest expenditure, if any, relatable to dividend yielding investment has to be considered as held in various decisions. It is also held in various decisions that only investments yielding dividend income has to be considered for the purpose of makin....
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....t contends that it has paid an excess of Rs. 158.75 crores over the net assets as cost of merger. According to the appellant, this excess amount was paid towards goodwill of amalgamating companies and it is subject to depreciation u/s 32. As the per the AO, the claim of depreciation on this excess paid over net assets is not maintainable as the assessee had not claimed the depreciation in the return of income and also has not shown this amount as intangible assets in the accounts and the same was adjusted with general reserve and share premium a/c. 27.2 The Appellant contends that entry in books of accounts is not determinative of the tax liability and that income tax Liability is determined as per provisions of the Income tax Act 1961. In support this contention, the appellant relied upon the ruling of Hon'ble Supreme Court in case of Kedarnath Jute Manufacturing (Supra). Besides this, the Appellant also claimed that depreciation is allowable on goodwill even though it is not claimed in return of income, in view of explanation 5 to section 32 which is reproduced as below: 32. Depreciation. (I) In respect of depreciation of- (i) buildings, machinery, plant or furniture, bei....
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....ain network, customers, vendors etc. Goodwill here is in fact, sum total of all commercial and business rights of Balsara group which the appellant acquired after merger with Balsara group companies. I have carefully gone through scheme of amalgamation / merger as approved by Bombay / Delhi High Court As per this scheme, assets and liabilities of amalgamating companies were to be carried / recorded in books of the appellant company at book value and cost of merger was to be set off against general reserve and share premium accounts of the appellant company. Therefore, as per scheme of merger approved by Hon'ble High Courts, excess payment / cost of merger was not to be booked as goodwill a/c. This accounting practice is also as per AS-14 prescribed by ICAI for accounting procedure of amalgamation. Facts of the case of CIT v SMIFS Securities Ltd. (supra) are essentially similar to facts of the present case. Accordingly, I hold that the excess paid over net assets amounting to Rs. 158.75 crores is in nature of goodwill within the meaning of section 32(1) of the Act r.w. explanation 3(b). 27.6 It's trite law that the AO is bound to complete assessment as per the provisions of the Ac....
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....ount [Clause 6.1(e)]; 113. He submitted that in accordance with the scheme of amalgamation, the assessee recorded the assets and liabilities of the amalgamating companies at their respective book value. The difference between the consideration of Rs. 168.47 crores paid by the assessee to acquire BHPL, Balsara Home Products Limited and BCL and net worth of Rs. 9.72 crores, being Rs. 158.75 crores represented intangibles and other factors in the form of goodwill, which was, in accordance with the scheme of amalgamation, adjusted by the assessee in its books of accounts as follows: a) Adjusted against share premium account - Rs. 58.36 crores b) Adjusted against general reserve account- Rs. 100.40 crores 114. Referring to the notes to accounts of the audit report, he submitted that the aforesaid facts were also duly stated in the Notes to Accounts, appended to the audited accounts. The ld. Counsel for the assessee submitted that the excess consideration of Rs. 158.75 crores was paid by the assessee to acquire various intangibles of Balsara group of companies, being brand and other commercial rights, all referred to as goodwill. He submitted that "Goodwill" described as such, is a....
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.... by a distribution network of 4 Zonal Offices, 10 Branches, 23 Regional Warehouses, and 1700 Distributors in 1500 towns." 114.1 The ld. Counsel for the assessee submitted that brand is a special intangible that in many businesses it is the most important asset. This is because of the economic impact that brands have. They influence the choices of customers, employees, investors and the government authorities. In a world of abundant choices, such influence is crucial for the commercial success and creation of shareholder value especially in case of companies engaged in FMCG products, brand plays a very important role contributing towards the overall business value. The major sales of such companies depend upon their brand name. He submitted that in the FMCG sector, one needs to be fast in translating the ideas into new products. There is a requirement to create the products that people trust, enjoy and use in their daily lives. Advertising and marketing have a vital role to play in this. People now are getting more & more health conscious and are getting concerned about what they are using. They buy only those products which are of a good quality and are of a reliable brand. 114.2....
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....ount representing the excess of consideration paid over the fair value net assets of Transferor Company(ies), recognised as goodwill, fall within the ambit of the expression "business or commercial rights of similar nature", so as to qualify for depreciation under section 32 of the Act. Referring to the following decisions, he submitted that depreciation is allowable on goodwill:- 1) CIT vs. Smifs Securities Ltd.: (2012) 348 ITR 302 (SC); 2) Areva T and D India Ltd. v. DCIT: 345 ITR 421 (Del); 3) Triune Energy Services Private Limited vs. DCIT: 237 Taxman 230 (Del); 4) Zydus Wellness Ltd: [2017] 87 taxmann.com 82 (Guj); 5) CIT v. Hindustan Coca-Cola Beverages (P) Ltd.: 331 ITR 192 (Del.) - SLP filed by revenue has been dismissed by the Supreme Court in SLP No. 26151/2011; 6) PCIT vs. Ricoh India Ltd: ITA No. 1127 of 2017 (Bom HC); 7) B. Raveendran Pillai: 332 ITR 531 (Ker.); 8) CIT v. Manipal Universal Learning (P.) Ltd : 215 Taxman 151 (Kar.); 9) Pr. CIT v. Swastik Industries: 240 Taxman 510 (Guj); 10) ACIT vs. M/s Birla Global Asset Finance Co. Ltd.: ITA No. 48984900/Mum/2008 -affirmed by the Bombay High Court: (2014) 221 Taxman 176; 11) CIT vs. RFCL Ltd.: (....
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....nd, the ld.CIT(A) allowed the claim of depreciation on goodwill as claimed by the assessee the reasons of which have already been reproduced in the preceding paragraphs. It is the submission of the ld. DR that when the assessee has not claimed such depreciation in the return of income and has not shown the payment of goodwill in its intangible assets and has adjusted it against the reserves and share premiums, therefore, the ld.CIT(A) is not justified in allowing the claim of depreciation on goodwill. It is the submission of the ld. Counsel for the assessee that the difference between the consideration paid by the assessee to acquire the business and net worth of the companies acquired by it represents the intangibles and other factors in the form of goodwill which were in accordance with the scheme of amalgamation. It is his submission that the amount representing the excess of consideration of Rs. 158.75 crores paid over the fair value of net assets of transferor companies recognized as goodwill fall within the ambit of the expression 'business or commercial rights of similar nature' so as to qualify for depreciation u/s 32 of the IT Act. 114.7 We find, force in the above argume....
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....For the purposes of this sub-section, the expressions `assets' and `block of assets' shall mean-- [a] tangible assets, being buildings, machinery, plant or furniture; [b] intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature." 4. Explanation 3 states that the expression `asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading the words `any other business or commercial rights of similar nature' in clause (b) of Explanation 3 indicates that goodwill would fall under the expression `any other business or commercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). 5. In the circumstances, we are of the view that `Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act. 6. One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no amou....
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....f the ld. Counsel for the assessee that in terms of Explanation 5 to section 32 of the Act, it is now mandatory to claim/allow depreciation, whether or not the assessee has claimed the same. Therefore, we are of the considered opinion that the AO should not have refused to consider the claim of depreciation despite the fact that the assessee raised such claim vide its letter dated 13.12.2010 addressed to the AO. In this view of the matter and in view of the detailed reasoning given by the CIT(A) on this issue, we find no infirmity in his order allowing claim of depreciation on goodwill. The order of the ld.CIT(A) on this issue is accordingly upheld and the ground raised by the Revenue on this issue is accordingly dismissed. 115. Now, coming to the additional ground of appeal, we find, the assessee in the impugned assessment year has raised the following additional ground:- "That the ESOP expenses of Rs. 10,35,36,606/- debited in the Profit & Loss Account ought to have been allowed as deduction in computing the income under the head 'Profit and Gains of Business." 115.1 The Id. Counsel for the assessee, referring to the above additional ground, submitted that this ground deserve....
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....(by the Revenue) and the Tribunal vide order dated 12.04.2017 for A.Y. 2006-07 has admitted the additional ground and has restored the issue to the file of the AO for deciding the issue in accordance with law, after giving due opportunity of being heard to the assessee. The relevant observations of the Tribunal read as under:- "87. We have considered the submissions of both the parties and carefully gone through the material available on the record. It is noticed that the additional ground has been raised by the assessee relating to the ESOP expenses which were debited in the profit and loss account but added back while computing the income allegedly under some misconception of facts and law. The issue raised by the assessee is a legal issue. 88. As regard to the admission of the legal ground, the Hon'ble Supreme Court in the case of National Thermal Power Company Ltd. Vs CIT (1998) 229 ITR 383 (supra) held as under: "The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assessee correctly the tax liability of an assessee in accordance with law. If, for ex....
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....ty of being heard to the assessee. We hold and direct accordingly. The additional ground raised by the assessee is accordingly allowed for statistical purposes. ITA No.6256/Del/2014 (By the Revenue - A.Y. 2008-09) 116. The grounds raised by the Revenue are as under:- "On the facts in the circumstances of the case the Ld. CIT(A) has erred in allowing appeal of the assessee and directing to deleted addition of Rs. 1,64,36,480/- made by the Assessing Officer on account of corporate guarantee given to the associated enterprises. 1. On the facts in the circumstances of the case the Ld. CIT(A) has erred in allowing appeal of the assessee and deleted addition of Rs. 2,80,55,365/- made by the Assessing Officer on account of interest on loan to the associated enterprises. 2. On the facts in the circumstances of the case the Ld.CIT(A) has erred in allowing appeal of the assessee and deleted addition of Rs. 1,91,30,000/- made by the assessing officer on account of royalty adjustment. 3. On the facts in the circumstances of the case the Ld.CIT(A) has erred in allowing appeal of the assessee and directing the Assessing Officer to recompute the deduction u/s 80IB and 80IC without furt....
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....nses on advertisement and sale promotion in their respective area for promotion of the brand which amounts to the services provided by the AEs to the asses see for completing the brand and consequently the addition as made by the TPO and sustained by the CIT (Appeals) in respect of the alleged royalty chargeable from Dabur International Ltd., Dabur Nepal Pvt. Ltd. and Asian Consumer Care Ltd. is arbitrary, unjust and at any rate very excessive. 5. That the TPO and CIT (Appeals) failed to appreciate the relevant clause of the agreement as existed in earlier years wherein as per the agreement, Dabur India Ltd. failed to incur the expenses for the promotion of the brand and marketing expenses in Dabur Nepal Pvt. Ltd., which ultimately and actually were incurred by Dabur Nepal Pvt. Ltd., which resulted into termination of the royalty chargeable under the then contract and consequently the CIT (Appeals) has erred on facts and under the law in upholding the chargeability of the royalty from Dabur Nepal Pvt. Ltd. 6. That the TPO and CIT (Appeals) failed to consider that most of the manufactured products by Dabur Nepal Pvt. Ltd. had been sold to Dabur India Ltd. which cannot be the bas....
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.....a. USD 2,750,000 NSGB Bank, Egypt 6 months LIBOR + 1.35% p.a Naturalle LLC, UAE USD 0.60 crores Rs. 13.06 crores The Royal Bank of Scotland, UAE 3 mnths LIBOR + 1.50% (20.05.2007 to 15.09.2007) 3 mnths LIBOR + 0.475% (16.09.2007 to 23.03.2008) 3 mnths LIBOR + 0.475%/0.875% for USD 28 lakhs and 32 lakhs resp. (24.03.2008 to 31.03.2008) Total Rs. 28.52 crores ' 122. It was contended in the TP report that the transaction being in the nature of shareholder activity, could not be considered as an international transaction in terms of section 92B of the Income Tax Act, 1961 and, accordingly no benchmarking was undertaken. However, the TPO rejected the contention of the assessee and computed guarantee fee at the rate of 4.68% on the basis of data obtained from State Bank of India u/s 133(6) of the Act and calculated as under:- Particulars Rate (in %) Average rate of bank rate of commission charged 2.68 Add:- Risk Adjustment 2 Rate 4.68 123. He accordingly, made an upward adjustment of Rs. 1,12,23,576 (4% of Rs. 39.44 crores) to the total income of the assessee. 124. In appeal, the CIT(A) held that issuance of corporate guarantee is an internati....
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.... Naturalle LLC, UAE. The grounds of appeal Nos.7 and 8 filed by the assessee are accordingly partly allowed. 128. Ground of appeal No.1 filed by the Revenue relates to the order of the CIT(A) in deleting the addition of Rs. 2,80,55,365/- made by the AO on account of interest on loan to the associated enterprise. 129. After hearing both the sides, we find the above ground is identical to ground of appeal No.3 in ITA No.3114/Del/2014 filed by the Revenue for A.Y. 2007-08. We have already decided the issue and the ground raised by the Revenue has been dismissed. Following similar reasonings, this ground filed by the Revenue is dismissed. 130. Ground No.3 raised by the Revenue relates to the order of the CIT(A) in directing the AO to recompute the deduction u/s 80IB and 80IC without further allocation the Head Office expenses to various units eligible for such deduction. 131. After hearing both the sides, we find the assessee in the instant case has already disallowed depreciation under Companies Act and has claimed depreciation under Income-tax Act and has duly allocated to various units. Similarly, selling and distribution expenses of Rs. 789.37 lakhs was suo moto disallowed in t....
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....ne Hundred Sixty Five only) being the exempted excise duty embedded in sales of Glucose Unit, Baddi (HP), allowed incentive for industrialization and setting up of new unit by Notification No. 1(10)/2001 NER dated 701/2003, read with Notification No. 49/2003 and Notification No. 50 of 2003 of Central Excise dated 10/06/2003, is a capital receipt not liable to Tax and accordingly the amount of Rs. 5,85,61,165/- (Rupees (Rupees Five Crore Eighty Five Lakhs Sixty One Thousand One Hundred Sixty Five only) be excluded from the income assessed." 137. The ld. Counsel for the assessee while explaining the reasons for admission of the additional ground in his application submitted that the assessee has a manufacturing unit located at Baddi, Himachal Pradesh which was set up in 2003 (25.01.2003) for the manufacture of Glucose which was eligible for deduction u/s 80IC of the Act. Since assessment year 2003-04, all the related particulars were duly furnished before the AO. The manufacturing unit was set up under the Policy of the Central Government to boost industrialization of Himachal Pradesh and Uttarakhand. The said scheme was introduced vide notification F. No. 1(10)/2001NER, dated 7th J....
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....exemption for a period of 10 years from the date of commencement of commercial production. (b) 100% income tax exemption for initial period of five years and thereafter 30% for companies and 25% for other than companies for a further period of five years for the entire states of Uttaranchal and Himachal Pradesh from the date of commencement of commercial production. (II) All New industries in the notified location would be eligible for capital investment subsidy @ 15% of their investment in plant & machinery, subject to a ceiling ofRs. 30 lakh. The existing units will also be entitled to this subsidy on their substantial expansion, as defined. (III). Thrust Sector Industries as mentioned in Annexure-II are entitled to similar concessions as mentioned in para 3(1) & (II) above in the entire state of Uttranchal and Himachal Pradesh without any area restrictions. " (emphasis supplied) 138. In pursuance of the said scheme, notification was also passed by the Central Excise Authorities vide notification No. 49/2003, dated 10th June 2003, the relevant extract of which is as under: "In exercise of the powers conferred by sub-section (1) of section 5 A of the Central Excise Act, ....
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.... Infrastructure Development Centre or Export Promotion Industrial Park or Industrial Estate or Industrial Area or Commercial Estate or Scheme Area, as the case may be, specified in Annexure-II appended hereto, from the whole of the duty of excise or additional duty of excise, as the case may be, leviable thereon under any of the said Acts. 2. The exemption contained in this notification shall apply only to the following kinds of units, namely (a) new industrial units which have commenced their commercial production on or after the 7th day of January, 2003; (b) industrial units existing before the 7th day of January, 2003, but which have undertaken substantial expansion by way of increase in installed capacity by not less than twenty five per cent, on or after the 7th day of January, 2003. 3. The exemption contained in this notification shall apply to any of the said units for a period not exceeding ten years from the date of publication of this notification in the Official Gazette or from the date of commencement of commercial production, whichever is later. " 140. On the basis of aforesaid scheme and submission of the claim, the assessee has been granted exemption from pa....
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..... If the object of incentive is to set up a new unit or extend the existing unit, then, it would be on capital account. Referring to the decision of the Hon'ble Supreme Court in the case of Ponni Sugar & Chemicals Ltd. (supra) he drew the attention of the Bench to the following observation of the Hon'ble Apex Court:- "14. In our view, the controversy in hand can be resolved if we apply the test laid down in the judgment of this Court in the case of Sahney Steel and Press Works Ltd. (supra). In that case, on behalf of the assessee, it was contended that the subsidy given was up to 10% of the capital investment calculated on the basis of the quantum of investment in capital and, therefore, receipt of such subsidy was on capital account and not on revenue account. It was also urged in that case that subsidy granted on the basis of refund of sales tax on raw materials, machinery and finished goods were also of capital nature as the object of granting refund of sales tax was that the assessee could set up new business or expand his existing business. The contention of the assessee in that case was dismissed by the Tribunal and, therefore, the assessee had come to this Court by way of ....
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....mechanism through which the subsidy is given is irrelevant. " 143. He submitted that similar principle has been reiterated by the Hon'ble Supreme Court in the case of CIT vs. Chaphalkar Brothers: 351 ITR 309 (Bom). In that case, the subsidy scheme of the State Government provided for an exemption of entertainment duty in Multiplex Theatre Complexes newly set up, for a period of three years, and thereafter payment of entertainment duty at the rate of 25 per cent for the subsequent two years. In the assessment order it was found that the aforesaid scheme was really to support the on-going activities of the multiplex and not for its construction. The Assessing Officer held that since the scheme took the form of a change in the gross value of the ticket and contributed towards the dayto-day running expenses, it was in the nature of a revenue receipt. The ld. CIT(A) dismissed the appeal. On further appeal, the Tribunal decided the ground in favour of the assessee holding that the receipt was in the nature of a capital receipt being an incentive to supplement the construction expenditure of new set up of Multiplexes hence in the nature of capital receipt. On further appeal, the Hon'ble ....
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....f the subsidy is to be determined having regard to the purpose for which it is granted. The "purpose test", referred to in Ponni Sugars & Chemicals Ltd. (supra) when applied to the case at hand, leaves no room for doubt that the assistance in the form of entertainment tax exemption is shown to have come in the hands of assessee to enable it to set up the new unit which renders it a receipt on capital account. The periodicity (year to year) of the subsidy, its source (collections from the public at large) and the form (deemed deposit) are irrelevant considerations. .................... 39. For the foregoing reasons, we find that ITAT in the impugned orders has taken a correct view of law on the basis of available facts to conclude that the assessee is entitled, in terms of the UP Scheme, to treat the amounts collected towards entertainment tax as capital. The question of law raised in these appeals is, thus, answered in the negative against the revenue/appellant. " 145. The ld. Counsel for the assessee, submitted that the 2nd additional ground deserves to be admitted in order to correctly assess the tax liability of the assessee in accordance with the provisions of law. 146. R....
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....as Wadhwani: 85 ITD 734 (Nag); xvi) Indo Java & Co. v. IAC: 30 ITD 161 (Delhi SB); and xvii) ITO v. GE Hawn : 2l ITD 553 (All.) 148. Referring to the following decisions, the ld. Counsel for the assessee submitted that additional ground on issue of subsidy was raised for the first time before the Tribunal in the following cases and were admitted:- i) Shree Balaji Alloys vs. ITO: 127 T'TJ 129 (Asr ITAT) - Confirmed by Supreme Court in Civil Appeal No. 10061 of 2011; ii) Indo Java & Co. vs. IAC: 30 ITID 161 (Del ITAT)(SB); iii) Crystal Crop Protection Pvt Ltd. vs. DCIT : ITA No. 1539 of 20l6 (Del ITAT); iv) Tripti Manthol Inds vs. ITO: ITA No, 58 of 2011 (Asr ITAT). 149. He submitted that the appeal against the decision of J&K High Court in the case of Shree Balaji Alloys vs. CIT, 333 ITR 355 has been dismissed by the Hon'ble Supreme Court in the order dated 19th April, 2016 in Civil Appeal No.10061 of 2011. 150. Referring to the decision of the Hon'ble Supreme Court in the case of NTPC vs. CIT, 229 ITR 383, he submitted that the Tribunal has wide powers to admit an additional ground which is necessary to determine the tax liability of an assessee in accordance wit....
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....ility of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, there is no reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of the item. There is no reason to restrict the power of the Tribunal under section 254 only to decide the grounds which arise from the order of the Commission of Income-tax (Appeals). Both the assessee as well as the Department have a right to file an appeal/cross-objections before the Tribunal. The Tribunal should not be prevented from considering questions of law arising in assessment proceedings, although not raised earlier. The view that the Tribunal is confined only to issues arising out of the appeal before the Commissioner (Appeals) is too narrow a view to take of the powers of the Tribunal." 153.1 It has further been held that: "Undoubtedly, the Tribunal has the discretion to allow or not to allow a new ground to be raised. But where the Tribunal is only required t....